How Much Does Payroll Outsourcing Cost? A Breakdown of Pricing
As a business owner, payroll is one of your most important functions. Not only does timely and accurate payroll enhance employee satisfaction, it also keeps you in compliance. Whether you’re a small company with just a few employees or a medium to large business, payroll can quickly get more complicated as you grow, have workers in multiple states, and become subject to legislative requirements regarding payroll, HR, and benefits. If this sounds like you and you’re thinking about outsourcing, you may be wondering what does payroll outsourcing cost?
The short answer? It’s surprisingly affordable. While pricing depends on a number of factors, you can generally expect to pay about $200-$250 per employee per year. Here, we’ll breakdown what’s behind this figure, including:
- Payroll pricing approaches
- Factors that drive up the cost of payroll
- Ways to save on outsourcing
After reading this article, you’ll understand what you can expect to pay for payroll outsourcing costs so you can decide if this solution fits within your budget.
How is payroll pricing structured?
While there are many different ways that payroll companies charge customers for their services, there are three common approaches you’ll likely see. In most cases, the fee structures primarily cover payroll processing only; additional services that may be helpful to business owners are a separate cost, which we’ll cover later.
In the examples below, we’ll calculate the average costs for a company with 10 employees that pays bi-weekly.
Charging fees per pay frequency is the most common way payroll companies charge for their services. That means however often you pay employees (weekly, bi-weekly, semi-monthly or monthly), you’ll be charged for the number of employees you pay each pay period. In most instances, the fees are made up of a base fee and a charge for each employee paid.
This approach is good for businesses with fairly predictable payrolls that don’t have a lot of changes or extra payroll runs. If this sounds like you, you can expect to see individual employee charges that run from $1.50 to $5 per employee and base fees per pay period between $20 and $70. So that means you would pay about $140 a month based on a fee of $3 per check and a base fee of $35.
Per Employee Per Month (PEPM)
This pricing structure is increasing in popularity because it often results in savings for employers. Rather than paying fees for each payroll, with PEPM, you can run unlimited payrolls and just pay one monthly base fee plus a fixed rate for the number of employees you pay each month.
PEPM is a good choice for companies who may have additional payroll runs for things like bonuses or commissions. In addition, for companies with a predictable number of employees paid each month, a PEPM pricing solution makes budgeting for the outsourced payroll cost very easy.
With this option, you would pay a base fee of about $75 and around $6 per employee, making your total charge for the month, in our example, roughly $135.
In some situations, especially with Do-It-Yourself (DIY) online solutions, a payroll company will charge a fixed rate per month that covers a set number of employees or a range such as $65 for 1-9 workers, $125 for 10-20 and so on.
That’s the only fee you’re charged for payroll processing, no matter how frequently you pay your employees each month. Be aware that some companies may cap the number of employees you’ll be able to process payroll for so this may not be an option for every business. But if you are relatively small and your employee count is pretty steady, this can be a simpler, less expensive approach to outsourcing payroll.
What Factors Drive Up the Price?
When considering the payroll outsourcing cost your business may incur, it’s important to understand exactly what’s included. This allows you to make accurate comparisons between companies and have a clear picture of what you’ll be paying.
In many cases, the quoted costs are just for processing payroll. Any ancillary products or services you want may be an additional cost. Think of it like an a la carte menu at a restaurant. And this is where things can quickly add up.
Examples of services that businesses may include or perhaps consider “extras” with payroll are:
- Tax filing (the price of which can increase based on the number of states you’re operating in)
- General ledger interface
- Employee pay options like direct deposit, pay cards, and paper checks
- Courier and delivery charges
- Check stuffing and sealing
- Customized file transfers for 401(k) and workers’ compensation reporting
- Quarterly and year-end reporting
- W-2/1099 and 1095 processing
- Affordable Care Act (ACA) reporting
Some payroll companies may include one or more of these services in their base fee. For example, at Complete Payroll Solutions, we include per-pay period and quarterly tax filing, employee pay options, and check stuffing and sealing as part of our standard base fee. But most often, you have to pay a separate fee for each add-on or buy a package that includes several popular services.
Depending on what services you choose to outsource and which you handle yourself, these extras can add up to hundreds of dollars and increase your total costs. The key here is to ask what is and isn’t included in the price quote to eliminate any surprises.
You may also pay more if you choose to add other solutions that payroll companies often provide to increase the efficiency of your HR functions like:
- Time and attendance
- Applicant tracking and recruitment
- Benefits enrollment
- Performance management
Usually, each of these solutions will have a unique and separate fee structure that you’ll pay in addition to your payroll processing fees.
Are There Ways to Save on the Payroll Outsourcing Cost?
Since there’s so much variability in pricing, you may be wondering if there are ways you can save on payroll costs. The quest for less expensive options has fueled the rise in popularity of Do-It-Yourself (DIY) online payroll software. These DIY solutions can cost up to 50% less on a PEPM basis.
The reason for the savings is that you as the employer take on more responsibility in the payroll process, such as employee maintenance, payroll detail entry, and report production. These solutions are also paperless so by paying your employees with alternate methods such as direct deposit, you don’t incur costs for things like check delivery.
For many businesses, the DIY option can be an excellent way to save as long as you’re comfortable with web- or mobile-based systems and limited interaction with your provider. It’s also convenient if your payroll company’s hours of operation make it challenging for you to deal with them during normal business hours and you would prefer to handle payroll before or after they are open.
But it’s also important to understand that there are some things you’ll be giving up with this approach.
For example, if you want to have some degree of support or assistance, many software solutions don’t offer that as part of the service. So if you want a relationship with your vendor or an option for call in/call out service, you may be better off with a payroll company that allows you to just report your employees’ hours and they handle everything else.
Another potential way to save on your overall payroll costs is to see if a payroll provider offers bundled options or packages. As we discussed, many vendors provide other complimentary solutions to help you manage your workforce such as benefits and HR consulting services. Often, you’ll realize a price break if you implement multiple services with your provider.
What Will My Total Price Be?
As you can see, there are many factors that can impact the total cost of payroll processing. While the general rule of thumb is that it will cost around $200-$250 per employee per year, your total price will be based on the scope of your engagement with your vendor.
This is a relatively small price to pay compared to the risks of doing it yourself like errors, late payments, or compliance issues. In fact, with each pay run, your payroll outsourcing cost will likely be lower than what you could spend trying to fix errors or pay penalties related to a compliance issue.
How to Choose the Best Payroll Outsourcing for Your Business
Outsourcing your payroll comes with a lot to think about, and cost is just one of the factors to consider. Start your journey by learning which companies we consider to be the best regional and national payroll providers. If you’re considering Complete Payroll Solutions as a partner, find out what our payroll outsourcing costs are for each of our packages.